How Recent California Tax Law Changes Impact South Bay Small Businesses
- Kim Yurosko
- Aug 22
- 5 min read
Navigating the Shifting California Tax Landscape
California’s tax code has always been complicated, but the recent 2024–2025 California Tax Law Changes introduce new layers of complexity that South Bay small business owners cannot afford to ignore. From suspended deductions to caps on credits and changing local tax rates, these updates affect both daily operations and long-term planning. Whether you run a retail shop in Gilroy, a consulting firm in Morgan Hill, or a restaurant in San Jose, staying compliant and profitable requires understanding both the state and local tax dynamics.
If you are looking for clarity, KY Tax Service & Bookkeeping is ready to help.
Major 2024–2025 California Tax Changes That Matter
Suspension of Net Operating Loss (NOL) Deductions
One of the biggest changes in the new state budget is the suspension of Net Operating Loss deductions for businesses with over $1 million in taxable income. This change, effective from 2024 through 2027, delays your ability to deduct previous years’ losses against current income.
For businesses focused on growth, especially those still recovering from the pandemic, this suspension may result in unexpected tax bills. If your business is approaching or exceeding the $1 million threshold, proper planning becomes essential.
Five Million Dollar Cap on Business Tax Credit Usage
Another important update is the new five million dollar cap on total business tax credit usage. Affected credits include popular programs such as the Research and Development Tax Credit and the California Competes Tax Credit.
If your business has historically used large credits to offset tax liabilities, this cap may shrink your savings significantly. You should reassess your credit strategy and update your forecasts accordingly.
Franchise and Entity-Level Taxes Remain in Effect
California’s annual eight hundred dollar minimum franchise tax is still in place, but Senate Bill 816 has been proposed to offer an exemption for small businesses under certain income thresholds. Although not yet law, this bill may provide future relief.
C corporations are still taxed at 8.84 percent
S corporations are taxed at 1.5 percent of net income
LLCs pay annual fees based on gross receipts
Knowing your entity’s tax obligations and tracking potential legislative changes are key parts of your 2025 planning.
Tax Incentives From Recent California Tax Law Changes That Many Businesses Overlook
California Competes Tax Credit (CCTC)
The California Competes Tax Credit helps attract and retain businesses in the state. It is not automatic. You must apply during specific periods and show plans for job creation or capital investment.
Many business owners miss out on this credit, even though it can result in significant savings. Prepare your application in advance and make sure your business profile qualifies.
Pass-Through Entity (PTE) Elective Tax Extension
There is good news for S corporations and LLCs. The elective pass-through entity tax workaround has been extended through 2030. This allows qualified businesses to bypass the federal ten thousand dollar SALT deduction cap by paying state tax at the entity level and deducting it federally.
If you have not opted into this program, now is the time to consider it. The savings can be substantial.
Still Time to Claim the Employee Retention Credit
Although the federal Employee Retention Credit (ERC) ended, eligible businesses can still file amended returns to claim credits from 2020 or 2021. If your South Bay business retained staff during that time, you may be able to recover thousands of dollars.
Why Local Tax Rates Should Guide Your Strategy
Sales Tax Rates Vary Widely Across South Bay Cities
Sales tax rates across the South Bay region differ by location. For example:
San Jose: 9.375 percent
Campbell: 9.875 percent
Morgan Hill: 9.25 percent
Gilroy: 9.25 percent
Santa Clara: 9.375 percent
These differences affect businesses with point-of-sale systems. Charging the wrong rate or failing to update your software could result in penalties or lost revenue.
To avoid mistakes, visit our bookkeeping services page for reliable support.
Business Tax Burden Changes Depending on the City
A recent Bay Area Council Economic Institute study found that tax burdens in San Francisco and Oakland are much higher than in South Bay cities like Santa Clara or San Jose. Still, every city has its own licensing requirements, fees, and surcharges that affect your bottom line.
Understanding your local landscape can help you make smarter decisions, whether you are expanding, relocating, or simply trying to cut costs.
Your 2025 South Bay Tax Planning Checklist
Here are practical steps every South Bay small business owner should take:
Review your 2024 revenue to determine if the NOL suspension applies
Track tax credit usage to avoid crossing the five million dollar limit
Make sure your POS system reflects the current local sales tax
Prepare for the next California Competes Tax Credit application round
Evaluate whether the PTE election still benefits your business
Check eligibility to retroactively claim the Employee Retention Credit
If you are unsure how to begin, start by exploring our services to get expert help.
Why Local Expertise Is the Key to Tax Compliance
California’s tax laws are challenging enough on their own. Add local regulations from cities like San Jose, Morgan Hill, and Gilroy, and the complexity only increases.
At KY Tax Service & Bookkeeping, we focus on helping businesses in:
San Martin
Morgan Hill
San Jose
Gilroy
Santa Clara
Our clients benefit from state-level knowledge combined with local experience. We understand the specific requirements of operating in South Bay cities and help businesses avoid surprises. Want to know more? Read our guide to California’s current tax system.
Conclusion: Don’t Let Tax Law Changes Catch You Off Guard. Call KY Tax Service & Bookkeeping Today!
The tax law changes for 2024 and 2025 are not small. They affect how much you owe, what deductions you can claim, and what credits are still available. Trying to keep up while managing your business can be overwhelming.
That is where we come in. At KY Tax Service & Bookkeeping, we help South Bay businesses simplify the process and take control of their financial future. Whether you need strategic planning or help filing amended returns, we have you covered.
Contact us today to book your consultation.
Frequently Asked Questions (FAQ)
What are the new tax laws in California for 2025?
New laws include the suspension of Net Operating Loss deductions, a five million dollar cap on tax credit usage, and continuing entity-level franchise taxes.
Is California suspending NOL deductions again?
Yes. Businesses with more than one million dollars in taxable income cannot claim NOL deductions from 2024 through 2027.
How much is the minimum franchise tax in California for an LLC?
The annual minimum franchise tax is eight hundred dollars. Senate Bill 816 may create an exemption for smaller businesses if it becomes law.
What tax credits are available for small businesses in California?
Available credits include the California Competes Tax Credit, R&D credits, and New Employment Credit, though some are now subject to caps and restrictions.
Are digital services taxed in California?
Generally, digital services are not taxed, but there are exceptions when digital products are bundled with tangible goods or delivered in certain formats.
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